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In this episode of Investment Uncut, show hosts Dan Mikulskis and Mary Spencer explore asset allocation for individuals with Ben Seager-Scott of Tilney.

Key takeaways:

• Ben has a process on setting asset allocation which is based around mathematical modelling to take out human / cognitive bias. This is a topic which we spoke about in last week’s episode here.  His advice is then to think about tactical allocation, using what’s happening now to tilt the framework.
• Purchasing power is tricky to achieve with real yields where they are. The reality is, investors are faced with either sticking where they are at a lower risk profile and accepting lower return, or accepting higher risk to generate a return that’s going to keep pace with inflation.
• When exploring different risk profiles, is risk volatility the key way of looking at risk? Investors often consider risk as drawdown risk rather than just  standalone volatility risk, but the risk approach will vary by client depending on their appetite and objectives.
• It is a pretty difficult time for clients with a focus on income. There are 2 different reactions: One, an angle towards strategy that harvests capital gains to drawdown on your asset pool rather than relying on an actual income; or looking at fixed income areas and exploring corporate bond options.
• How has general approach to asset allocation changed over last few months? Main operating advice is don’t trade too much in the middle of crisis as markets are trading in a dysfunctional way. There is not much information but a lot of emotion.
• Inaction can be the right course of action, but it is an active decision.
• Ben manages gold for clients – as a pseudo currency to balance inflation risk. There is a skydiving link!
• How do you communicate with clients on the risks of inflation? Ben uses scenario testing in the background, but the problem here is scenario rarely happens again. Instead try to keep it relatable to clients. Show them, particularly those that lived through times of higher inflation, the display purchasing power of the pound over last years.
• These are currently extraordinary times to be a financial adviser, balancing the need to preserve purchasing power with the risk of being too cautious.
• There is one way in which the recent volatility is helpful. Ben had a concern mid 2018 that people thought investing is easy as a lot of stuff goes up. This current environment serves as a reminder that uncertainty and risk is a real thing.
• Has behaviour changed for individual investors? Views have changed – back in the day the ethos was to make as much money as you possibly can. Now it's focused on outcomes and questions such as what’s the best way to obtain this and can you tolerate risk?
• Ben’s preference on approaches to investing - active management or passive?
• Making tactical switches: This tends to come down to opportunity cost such as is this environment expected to thrive? Are they better?
• Lessons learned? With managers it pays to set out expectations, what areas they thrive in and what can challenge them. Is it performing in line with expectations?
• Getting the right blend between mathematical and behavioural finance.
• Black swan tells us to go halfway between instincts and computer-based decision to mitigate human bias.

One thing to takeaway

• To be a successful investor, it’s about focusing on outcomes, keep a cool head, and working to a long-term time frame – cool, calm and collected.

Most under appreciated thing about investing?

• Time and compound interest – let them do the heavy lifting for you

Recommendations

• Tilney podcast
• Simon Thomas - Life interrupted
• Tim Hartfield - Cautionary tales

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Each LCP investment uncut podcast is for information and marketing purposes only and does not constitute any form of investment or financial advice or a financial promotion (under the Financial Services and Markets Act 2000). All views expressed by the podcast hosts and guests are purely their own opinions and do not represent those of LCP, its clients or affiliates. Our podcast listeners should always seek independent financial or legal advice before making any financial or investment decisions. Please refer to the Legal Notices section on the LCP website for further information.​